With effect from 1st June 2020, NSE’s new Margin Policy Framework has structurally changed how margins are calculated. Margins for naked positions in F&O will require more margins and hedged positions will require much lower margins in comparison.
As per SEBI circular dated 24th February 2020 and NSE Circular dated 15th May 2020. Margins
required for trading in Equity derivatives segment are going to be revised from 1st June 2020,
Monday. Therefore, on Monday whose positions have hedged, the margin requirement will reduce significantly and unhedged/naked positions will need to bring in more margin money to hold positions.
- The Immediate Implication – The reduction in the margin requirement for various hedged options strategies with lesser risk potential has been reduced to almost 70% of what was required earlier depending on the position.
- If a trader takes two mutually offsetting or hedged positions, this new margin framework will allow them to reduce the total margin pay-in required to hold these positions. We believe this will reduce the expected hedging costs and the potential yields for these low-risk strategies will go up significantly, therefore it will shoot up the open interest & hopefully better market depth. For example, if you are doing a put-call arbitrage, the margin requirement will be only 27,000. Earlier, 90,000 was required for this.
- However, the margin required for unhedged or naked F&O positions is likely to go up slightly. For instance, if you have a short position in Nifty Futures, it used to require ₹1,12,000 per lot for overnight positions. Now you will need ₹1,24,000 (₹12,000 extra).
- Price Scan Range (PSR) which is used to assess the FNO margin for worst-case scenario loss has been scaled up to 6σ (sigma) from earlier 3.5σ, which will make the margin requirement somewhat dynamic as when markets volatility picks up, the margin required for naked positions will be higher and will be reduced as the volatility in the market subside. With the new formula, the margin requirements will change gradually as it has more volatility memory.
- In derivatives, the large notional margins getting applied due to option minimum margin and Extreme Loss Margin (ELM) being which accounts for the high margin requirement. As the new margin framework came into existence, the ELM is approximately halved which reduces the notional component of the margin.